PANC 2017: Behavioral Finance and the Future of Improving Retirement Outcomes in the Digital World

Professor Shlomo
Benartzi, business school professor at the University of California, Los
Angeles (UCLA), Anderson School of Management, and senior academic adviser at
the Voya Behavioral Finance Institute for Innovation, told attendees of the
2017 PLANADVISER National Conference (PANC), Friday, that behavioral economics
has the potential to markedly improve plan participants’ retirement outcomes.

He reflected on
the campaign detailed in his book “Save More Tomorrow.” Basically, he said,
people want to save, but will say they have no money to do that today. The
campaign asked employees to save more later—specifically, when they get an
annual pay raise. At that time, they will start receiving more, but if that
money goes right into savings, they will not miss it. “People forget,” Benartzi said. “So, the
campaign’s idea was to combat inertia with automatic savings.”

According to
Benartzi, it took two years to find a plan sponsor willing to try out the concept,
and the results were convincing. Average participant savings with the “Save
More Tomorrow” campaign went from 3.5% in 1998 at that employer to 13.6%% in
2002. The plan sponsor, along with its adviser, asked the lowest savers to
increase their contribution by 3% each year up to 12%, and 80% of them signed
up. Benartzi said almost all who did so remained in the retirement program, but
nearly 20% stopped at 9.4%. However, not one participant dropped back to a lower
saving rate, and those who continued in the program and retired did so having four
times as much retirement income.

According to
Benartzi, it took about 20 years for the ideas from “Save More Tomorrow” to
fully catch on—the industry needs greater speed and scale to get more savers to
their retirement income goals.

He said
technology is the tool. Attendees of his discussion received a copy of his new
book, “The Smarter Screen: Surprising Ways to Influence and Improve Online
Behavior.”

A study by the
University of Colorado with people who received 24 hours of financial education
found general education did not work, but “just-in-time” education did.
Benartzi explained that new savers do not need education about missing
compounding interest opportunities if they cash out their savings at a job
change—that information won’t stay with them. However, people shown the
financial dimensions of their lives—how much they make and how much they
spend—made progress. The study found that people provided with a mobile app
offering this personal finance information checked it every two days; many used
it in the morning before they made daily purchases. Spending went down by
15.7%, he said.

NEXT: Digital nudging

According to
Benartzi, researchers measured the return on investment (ROI) of different
digital nudging campaigns—what was the increase in retirement contributions per
$1 spent. Showing participants the tax incentive of saving in their defined
contribution (DC) plan resulted in only an ROI of $1.24 in savings per $1
spent. “No one understands tax rates, so that was not a big incentive,” he
said.

Showing
participants the matching contributions they will receive had a better ROI of
$5.59 in savings, and financial education generated an ROI of $14.58 in
savings. However, a simple email nudge showing what amount a participant would
accumulate over time or the amount they would get if they took action resulted
in an ROI of $1,600.

Benartzi said
digital displays are attractive to participants because they are anonymous and
there is no judgment. People will answer questions differently on an anonymous
digital display than in person.

He shared some
tricks for using technology to nudge people to save more. For example, if
people read fast, they fail to take in all the information. Using digital
tricks to slow down reading speed, such as setting off the text with ugly fonts
or shadows, will get people to understand and remember what they read.

In addition,
people have visual biases. In one study, Benartzi said, people were asked which
of three desserts they didn’t like. But when they were asked to choose from three
desserts they were shown online, with their least favorite placed in the
middle, people always chose that dessert. “Think about where you put savings
rates participants can choose on the screen,” he told conference attendees.

He also pointed
out that when people have to make a decision with pen and paper, they get more
emotional and think about it more. But, with digital tools, they don’t think as
much, so participants should be offered a one-click solution to enroll in the
plan, but not to cash out.

Further, digital
nudging can be personalized. Benartzi reflected on how Amazon guesses what
people want to buy and will stock those items near a person’s house, so that
when he does order them, he receives them faster. “This is the level of
personalization we have to get to,” he said.

In terms of retirement
plans, he predicts we will get to a place where people will not be automatically
enrolled at the same savings rate, and some will be auto-enrolled at a higher
rate. “There are lots of opportunities for personalization with big data,”
Benartzi said.

He noted that,
on a website that showed participants what they have and what they need and that
suggested savings rates between 6% and 11%, the opt-out rates were nearly flat
across all suggested savings rates. “It was a beautiful result. We got them to
save more income quickly,” he said.

Benartzi
concluded that, even though the “Save More Tomorrow” campaign took two decades
to catch on, plan sponsors, advisers and providers can apply the digital nudge
ideas right away to give participants a lift.